Q & A – Japan’s Negative Interest Rates and their Effect on RE Property Investment

Japan Real Estate News

Bank of Japan, Tokyo

15 Sept, 2017 –

This Week in his Q&A column on “Asian Property Review” magazine, NTI’s Asia-Pacific Executive Manager, Mr. Ziv Nakajima-Magen explains the impact of negative property rates on the property market and financing.

Q : I read that Japan now has negative bank interest rates. How would this affect my property loan denominated in yen? And how would this impact the Japanese property market overall?

ZNM: This move by the Bank of Japan (BOJ) is the latest in a series of attempts to re-ignite healthy inflation in the world’s third largest economy – and mainly because the previous attempts have been met with only limited success. BOJ governor Kuroda, who was appointed by and works closely with Prime Minister Shinzo Abe since 2012, is hoping that by taxing financial institutions’ funds kept in the country’s central bank, he would be able to force these institutions to invest in a more diverse, global and constructive manner – rather than “sit” on their deposits as they have been doing historically.

The reason for this lack of diversity, aside from the infamous Japanese mentality of avoiding risks at all costs, is mainly due to the fact that any interest, even a very modest one, becomes far more positive in a deflationary environment, where costs of domestic goods and services keep dropping – as do nominal wages. By taxing these deposits, Kuroda hopes to force these institutions to withdraw and invest their (and their clients’) capital, thereby turning a deflationary cycle into one of growth.

Regardless of the results of this exercise, one should not assume that banks will now start paying borrowers to borrow, or even reduce interest fees accordingly – in fact, some even speculate that they may increase rates, to cover their own increased borrowing costs. The reasons for this are various (aside from the obvious greed factor) – firstly, banks are not obliged to pass any such rate hikes or reductions on to their clients, and often quote a myriad of reasons stating why they cannot, or will not, do so. Secondly, the effects of this maneuver on the value of the Yen is yet to be determined – if the very mild effects this announcement has had on the stock market is anything to go by, it may be very lukewarm indeed – and a yen-denominated loan taken in another country, with associated international fees and interim middle-men and institutions, may be affected even less. Lastly, and perhaps most importantly, a drastic reduction in official bank interest rates, which would have to also be applied to client savings, may kick off a withdrawal frenzy, which the banks and government will want to avoid at all costs.

As for effects of this particular move on the property market – again, if its effect on the stock market is anything to go by, I wouldn’t keep my fingers crossed – it will take far more than a single headline grab and policy aspect implementation to move things one way or another. The property market is closely tied to the economy as a whole in a “chicken and egg” type of symbiotic relationship – and deep and meaningful structural, social and economic reforms will still be required for the market to respond positively in any meaningful, long term way.

If viewed on its own, this particular strategy may do nothing – but if joined with other policies designed to tackle Japan’s big issues, such as the declining birth rate, gross national debt and outdated approach to globalization – it may just be a big step in the right direction.

(Source – “First Published in ‘Asian Property Review,” Pic – Sapporo at Night / “OiMax“)

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